Adopting the old ‘split-level’ strategy

At last, we can put 2009 to bed. With the release of the gaming and tourism statistics for the past calendar year, we can now start to look forward to a future that, in many ways, is looking surprisingly retro.

For a variety of reasons, 2009 felt far worse than 2008. It wasn’t just that a million fewer visitors came to the city than in the year before; it was the final realization that maybe Las Vegas wasn’t immune to an economic slowdown.

There had been reverses before—five or six, in fact, going back to the 1960s. But in hindsight those look like nothing more than speed bumps, not serious setbacks. And the solutions that worked in the past—playing to the mass market (1983), going upscale to attract a mildly moneyed visitor (2003)—haven’t been working this time.

The biggest issue Las Vegas hotels are confronting is a widespread drop in consumer spending. This Gordian knot of discretionary spending isn’t unique to Las Vegas, but it’s had a particularly acute impact here.

“We certainly wish that we could get visitors to spend more,” says Kevin Bagger, senior director of marketing for the Las Vegas Visitors and Convention Authority. “But the broader economy is making people more cautious everywhere.”

Looking at the trends, one seems clear: The milder drop in visitors compared with 2008 came at the price of room rates. Before picking up in September, visitor numbers had declined for an unprecedented 15 consecutive months.

In May 2008, the last month before the decline, the average night’s stay in Las Vegas cost $135. With some fluctuations, room rates fell to $84 in August 2009, after which visitor numbers finally began to increase again.

The big question is, will lower room rates pay off in the long run? It’s been keeping business brisk on the weekends. Yet the continuing weakness of the casino numbers outside of baccarat suggest it’s the high-rollers who are pulling us out of the doldrums.

So casinos are pursuing a “split-level” strategy that harks back to the 1970s and earlier—keeping prices low for bargain hunters while pursuing high-end play at the baccarat tables. It’s not the mid-1980s approach of making a profit on the sheer margin of visitors, since it’s much more expensive to borrow, build and maintain casinos today. And it’s not the early-2000s pursuit of free-spending travelers willing to pay a premium for rooms, food and entertainment. It’s looking like a little bit of both, taken to extremes.

Responding to the paradox of falling visitation and a recent doubling of the baccarat numbers on the Strip, Bagger says “high-end play is not driven by volume.” Still, the city is carefully pitching itself to the masses.

“We’re strongly promoting value propositions, as well as regional marketing to nearby feeder markets like Los Angeles, San Diego, Phoenix and Denver,” Bagger says.

This makes sense, since most of these cities are within driving distance and they still have plenty of airline seats available. Yet, with consumer spending down, these thrifty travelers aren’t going to spend enough to pay off the debt on the massive casinos—old and new—that entertain them.

Which is where the high-rollers come in. In one hour, let alone one night, someone betting $20,000 a hand at baccarat—which is not uncommon—can make more money for a casino than 4,000 sold-out hotel rooms. Still, it’s nice to have the revenue from those rooms to fall back on.

That’s why the retro-sensible split-level strategy—bargain hunters and ultra-rollers under one roof—is going to be the key for survival in the year ahead. Until consumer confidence improves across the board, Las Vegas will be beholden to both beer budgets and champagne tastes.

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